Snapchat IPO worries skeptics, despite buzz
Dearth of new stock listings and big millennial base has investor excitement growing
There’s certainly skepticism around the business case for Snapchat, the disappearing-photo messaging app once synonymous with teen sexting. And there’s concern over whether an expected initial stock offer valuing parent Snap Inc. at $25 billion (U.S.) can possibly be justified.
But there’s also a growing buzz that the offering, possibly this spring, will be the blockbuster tech IPO of the year.
The excitement is in part due to a waning IPO market amid increasing investor demand for profitable growth, with the dearth of new listings, according to PwC research, implying higher valuations for a smaller number of offers.
But Snapchat is also very much a dominant player when it comes to U.S. millennials, who are highly coveted by online marketers for their tech savvy and because they are likely to increase discretionary spending in step with rising incomes in coming years.
Moreover, Harvard Business School professors Marco Iansiti and Karim Lakhani argue that the ephemeral nature of the app which allows users to share selfdeleting selfies is ideally suited to the Internet age.
By launching ads that disappear after a set amount of time and dispensing with the typical Internet advertising model of charging per impression or click, and instead demanding top dollar for advertising by the day, Snapchat is capturing a revolutionary spirit and offering a window into what drives value creation in the digitalized economy, the professors say.
In an introduction to their elective course Digital Innovation and Transformation, they suggest that the company’s focus on images rather than text also provides insight into the form of communication most attractive to young people and other early tech adapters.
That’s a view backed up by several academic studies demonstrating that teens and young adults tend to be more interested in viewing pictures and videos than the text-focused media seen on Twitter and Facebook.
Snapchat has also taken steps to clean up its image in the run-up to an IPO, more explicitly restricting news and photos that lack editorial value and clarifying ambiguous language regarding policies on stories containing nudity, profanity and violence.
The Los Angeles-based company has added hardware in the form of Spectacles, a pair of sunglasses that doubles as a camcorder, and has promised more gadgets as it seeks to diversify.
A great deal has been made of the hardware adoption, although Pivotal Research analyst Brian Wieser said it’s not clear how much of a focus the company is really going to put into the business.
“We’ll get more details presumably when they file their (registration documents), but so far their efforts with hardware seem relatively experimental.”
Indeed, many of Snap’s plans remain shrouded in mystery since the company has confidentially filed paperwork with the U.S. SEC in advance of a pending public filing. The confidential filings are reserved for emerging companies with less than $1 billion in annual revenue.
Snapchat is thought to have more than150 million active daily users, up from110 million a year ago and is also almost certainly losing money as it spends to build out the business, making IPO proceeds a means to continue expanding its offerings and market presence.
Recode has reported that the company aimed for revenue of $300 million to $350 million for 2016 and has raised at least $2.63 billion from early investors including Alibaba and CapitalG, the equity fund of Google parent Alphabet.
It is reportedly making pitches for big ad deals in the U.S., while companies such as Facebook experiment with versions of key Snapchat fea- tures including “Stories,” short usergenerated photo and video montages that disappear after 24 hours.
All of this helps account for Snapchat’s fast advance since its launch in 2011to become among the most popular social networks for U.S. millennials and its plans for an IPO that has not yet been announced or priced.
“Any time you have a brand-name company, you’re going to have a lot of interest,” said Ivan Feinseth, director of research at Tigress Financial Partners. “They are very strong in the teen, preteen and the millennial market. They’re a key player.”
Still, there are the skeptics who question whether Snapchat can scale up monthly active users from its current100 million and its revenue from features such as ad filters and promotions accompanying “live stories” that show user-submitted photos and videos from cities and events across the world,
“They need to show they are not just a Facebook for teens,” said Gene Munster, who co-manages investment firm Loup Ventures.
He added that the company’s penchant for control and secrecy and its use of unusual metrics to gauge audience numbers are less than comforting to Wall Street.
In a note, Trip Chowdhry, managing director of equity research at Global Equities Research, called Snap “total junk,” worth a small fraction of its current valuation and said it should be avoided by investors when it goes public.
“We are at the tail end of the social media boom. Novelty is giving way to fatigue,” wrote Chowdhry, who is widely regarded as a bear on many technology stocks. “Fundamental investors should avoid the IPO. Snapchat is a total junk, hyperinflated.”